What, Me Worry? UAL Readies for Confirmation Showdown
As UAL makes its final preparations for tomorrow's confirmation hearing, it surely is focusing its aim on the objections of the trustees for the holders of unsecured aircraft public debt and on the objections of the unions for the pilots (ALPA) and the flight attendants (AFA). Recent filings by UAL, however, suggest that its attitude as it enters the confirmation hearing is best captured by Alfred E. Neumann's favorite catch-phrase, "What, me worry?"
The Unions' Attack on UAL's Proposed Management Equity Incentive Plan
The WSJ Law Blog, Ideoblog, and the Business Law Prof Blog recently cited to and commented upon last Sunday's highly-charged NYT article by Gretchen Morgenson attacking the UAL Management Equity Incentive Plan (MEIP) as excessive, and even "exceed[ing] what was described as 'reasonable' by Towers Perrin, the compensation consultant employed by the company." These harsh refrains echo the separate objections filed by ALPA and AFA (here and here) against the proposed MEIP (which at the time the objections were filed offered almost 50% more than the recent scaled down version approved by the Unsecured Creditors' Committee and made part of the revised "Second Amended Plan" filed yesterday).
An interesting bankruptcy litigation angle to this dispute over the propriety of the MEIP relates to the unions' proposed use of expert testimony and other evidence related to "employee morale" or "shared sacrifice" in support of their objections. Last Friday, UAL filed this motion in limine to exclude the unions' use of such testimony and evidence. The primary focus of this objection is UAL's attempt to bar the testimony of the AFA's proferred expert, Thomas Jones, a professor of business ethics at the University of Washington School of Business, who was retained by the AFA to testify about the "ethical questions" surrounding UAL's proposed MEIP. UAL argues in its motion in limine :
After considering the matter for two days, Jones opined that by providing equity-based compensation to certain members of United management, the MEIP violates various theoretical principles of business ethics and moral philosophy (including the "Golden Rule" and Kant's Categorical Imperative). According to Mr. Jones, these ethical issues might indirectly affect United's economic performance by violating the promise of "shared sacrifice" that has underlain United's reorganization. As described below, Jones' opinions are not only entirely unsubstantiated and unreliable but -- more importantly -- are irrelevant to United's plan of reorganization, Section 1129's confirmation standards, or any other provision of the Bankruptcy Code....
Jones' views on business ethics and morality, as intellectually stimulating as they may be, have absolutely no bearing on whether United's proposed plan of reorganization should be confirmed or any other question this Court must decide. The primary thesis of Jones' expert report appears to be that "[g]ood ethics will ... help a firm outperform other similarly situated firms." After explaining the theories of "moral trust" and "moral commitment," Jones applies the Prisoner's Dilemma to conclude that "moral solutions to commitment problems are more efficient than economic incentives" and that "honest, trustworthy individuals will have more opportunities than will those who lack these traits." "Expert" analysis of such general theoretical principles is completely irrelevant to the issues before the Court.
Jones spends about one page of his report purportedly applying his general ethical principles to United's MEIP. Specifically, Jones opines that the MEIP "would make a mockery of shared sacrifice," break some "explicit promise" (thereby violating "the Golden Rule"), and make it "virtually impossible" for United management to "establish morally embedded relationship" with their employees. ... Try as the AFA might, no amount of advocacy can link Jones' opinions to any legal standard relevant here.
Applying the standards of Daubert v. Merrill Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993) and its progeny, it's difficult to see the Court permitting Professor Jones to testify as an "expert" on the fairness of the MEIP from an ethics perspective. The ALPA's and the AFA's responses to UAL's motion in limine can be found here and here, respectively.
UAL's Response to the Objection of the Aircraft Debt Trustees
After receiving an exclusive assignment of an amount not to exceed $100 million of value from the PBGC Claim, the Trustees now object to an assignment of a portion of the PBGC's claim that was foreshadowed in the Disclosure Statement, and that is simply the mirror image of the prior assignment for their benefit alone that the Trustees demanded and received five months ago. The Trustees' sole argument is that United's direction of the assignment of 45% of the PBGC's UBL claim adversely modifies the Plan and violates the Term Sheets approved as part of the PDG Settlement. It does neither. The Assignment does not affect the Plan, is not a modification of the Plan, and does not violate the Term Sheets. The workings of the assignment provision in the PBGC settlement were (i) fully disclosed as part of the PBGC Settlement Agreement (which the Trustees supported as modified to incorporate language specifically relating to them); and (ii) later expressly set forth in the Disclosure Statement. The Debtors have fully complied with that provision in all respects. The Trustees' faulty memory may stem from the fact that when the Trustees were assigned some $100 million of the PBGC UBL claim to the exclusion of all other creditors, the Trustees fully accepted the benefits of the PBGC Settlement Agreement and kept silent regarding the selective nature of that assignment.
Now that the remainder of the PBGC UBL claim is to be assigned in a manner fully consistent with and foreseeable under the PBGC Settlement Agreement, but not to the Trustees' liking, the Trustees are attempting to make the assignment clause a Plan and Term Sheet issue. It is not.
Simply put, United has satisfied the standard set forth in the PBGC Settlement Agreement to assign the remainder of the PBGC UBL claim as provided in its January 13 notice, and the Trustees cannot now attack that assignment as inconsistent with the Plan. Because the Trustees' objection is based on the false premise that the PBGC assignment is a Plan issue, every argument flowing from this premise is tainted. And the fact that the Trustees consistently, indignantly and hyperbolically cling to their false premise does not make it any less false.
Finally, because a selective assignment was completely foreseeable and contemplated in the PBGC Agreement and the Disclosure Statement, the actual Assignment raises no new issues and the Trustees' objection is untimely. Therefore, the Trustees' objection should be overruled.
Similarly, in the absence of any Plan modification, material or otherwise, the Trustees' Rule 3018 Motion must also be denied. The only question for this Court is whether the substantive requirements set forth in the PBGC Settlement Agreement are satisfied and the answer to that question is clearly "yes."
Look's like UAL's ready to takeoff and fly. Everybody sing ---
Ground Control to Major Tom,
Take your protein pills and put your helmet on.
Commencing countdown, engines on.
Check ignition and may G-d's love be with you.
Ten, Nine, Eight, Seven, Six, Five, Four, Three, Two, One, Liftoff.
Ground Control to Major Tom,
You've really made the grade.
And the papers want to know whose shirts you wear.
Now it's time to leave the capsule if you dare.
1/18/06 Update: The Creditors' Committee late yesterday filed this response to the Trustees' motion, arguing:
In order to fabricate support for both PDG Motions, the Trustees must ignore or misstate the effect of the Committee's settlement, the significant disclosure with respect to the Committee's objectives that accompanied the Plan for which they voted, the terms of the Debtors' settlement with the Pension Benefit Guarantee Corporation ("PBGC") that permitted the Debtors to direct all or any part of 45% of the PBGC claim (the "PBGC Claim Assignment"), and the terms of their own settlement with the Debtors which allocated $100,000,000 of the PBGC Claim Assignment to their noteholders alone and then capped their entitlement to any part of the PBGC Assignment Claim to that amount.
In reply to UAL's sharp critcism of the trustees' change of heart, the trustees' have filed this reply, arguing (at p.2) that UAL's response is flawed in at least six "critical particulars" (all of which are variations on the theme of unfair and discriminatory treatment and inadequacy of notice and disclosure).
© Steve Jakubowski 2006